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FX | Economy

US May nonfarm payrolls look vulnerable to a significant downward revision and do not change the weaker USD outlook

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A solid US May nonfarm payrolls defies almost all leading indicators on jobs

  • USD: Friday’s US May nonfarm payrolls report shows establishment survey payrolls at a stronger than expected 272k jobs in May, well above consensus for 175k and Citi Research’s 140k. However, the more volatile household survey is much weaker with employment down 483k on the month. That means that even with a 0.2pp drop in the participation rate, the unemployment rate rises 0.1pp from 3.86% to 3.96% (rounding to an above-consensus 4.0%). However, average hourly earnings are also up 0.40%MoM, above consensus for 0.3%MoM though the stronger reading may be partly due to a longer survey period which tends to bias total earnings higher and lead to a stronger ratio of earnings per hour. Meanwhile, hours worked are unchanged at 34.3.
  • USD: The surprisingly strong job growth is likely to keep Chair Powell and the FOMC on hold in June and July waiting for more data on slower activity and inflation to cumulate. That said, the establishment survey on payrolls (272k rise) continues to look the “outlier” amongst other labor market indicators that are much softer. This also includes the QCEW employment numbers that payrolls are benchmarked too, meaning the establishment survey payrolls will likely be revised down or at least come in weaker in upcoming months. Indeed, over the last year household employment is up by just 376k while establishment survey payrolls are up by 2.8 million.
  • USD: Fed officials have been very reactive to monthly data – which means Friday’s May payroll report is enough for them to stay in wait-and-see mode a bit longer. But the steady rise in the unemployment rate and broader deterioration in the labor market will increasingly be cause for concern amongst Fed officials and by September, Fed officials will likely have pivoted to the employment mandate.


US ISM manufacturing in contraction, ISM services improves but with employment still in contraction, JOLTS data shows US job market weakening

  • USD: In data released earlier last week, US ISM Manufacturing surprises lower in May, falling to 48.7 from 49.2 with both the new orders and production indices falling, but with the employment index surprisingly up. New orders decline for the second month in a row to 45.4 from 49.1, the lowest level since early 2023 and the production index falls to 50.2 from 51.3. The prices index also falls to 57.0 from 60.9, after rising for several months prior. But the employment index surprisingly increases to 51.1 from 48.6, the highest level since August 2022. ISM Manufacturing continues to point to a manufacturing sector that remains in a mild contraction, with new orders declining for two months in a row. With the backlog of orders in contraction since 2022 and new orders falling, the production index is at risk of declining back into contractionary territory again, after it just barely remained in expansion at 50.2 in May. Overall, hard manufacturing production data has not shown any sign of a meaningful pick-up. With real goods demand weaker this year and still-elevated interest rates, Citi Research continue to expect the manufacturing sector will not show any meaningful pick-up this year.
  • USD: In data released later last week the ISM Services Index surprises higher in May, increasing to 53.8 from 49.4. Most of the increase is driven by a jump in the business activity index to 61.2 from 50.9. The employment index also improves modestly but remains in contractionary territory at 47.1 and the prices index moderates lower to 58.1 after increasing in April. Overall, looking at a 3m moving average, ISM Services points to continued expansion in services activity with the business activity sub-index within range of the last 12 months. This is consistent with continued growth in services consumption although real growth has slowed somewhat recently compared to late 2023/early 2024.
  • USD: Another barometer of US labor market health released last week, JOLTS job openings also falls to 8059k in April from a downwardly revised 8355k in March, a larger decline than consensus had expected. Still-low hiring and quit rates and declining openings continue to suggest weakening demand for labor. The ratio of job openings to unemployed workers falls to 1.24:1 in April, very similar to late-2019 levels. The total hiring rate is unchanged at 3.6% from an upwardly revised estimate in March (at 3.5% initially) and the quit rate is also unchanged at 2.2% after being revised higher in March from 2.1%. Meanwhile, the layoff rate remains low at 1.1%. The overall data will likely be characterized by Fed officials as a “normalization” of the labor market and Chair Powell could highlight next week that supply and demand in the labor market is now better balanced. But as the labor market moves from excess demand (too tight) to excess supply (too loose), further weakening, including job losses, is likely in the coming months. Overall, falling job openings and low hiring and quit rates in April JOLTS data continue to suggest weakening demand for workers and a loosening in the labor market that, for now, will continue to be characterized by Fed officials as “normalizing”.


Canada’s unemployment rate still ticking higher

  • CAD: In data released Friday, Canadian employment rises by 26.5k jobs in May, in line with consensus but a pace that is considerably softer than the rate of population growth. This leads the unemployment rate to rise to 6.2% with the labor force participation rate unchanged at 65.4%. However, wages are unexpectedly strong at 5.2%YoY.
  • CAD: Job growth in Canada continues to run slower than the pace of very strong population growth, with the unemployment rate rising further in May in an overall mixed employment report. At 6.2%, the unemployment rate is still close to pre-pandemic levels. But further weakening in the second half of the year in line with a weakening labor market in the US could see Canada’s unemployment rate approaching 6.5%, an increasingly uncomfortable scenario for the BoC. This widening in the output gap would also imply further downward pressure on inflation that would make officials comfortable cutting rates further. Citi Research expect 25bp rate cuts at each remaining meeting this year, implying a further 100bp in cuts by 2024-end from the current 4.75%.


Week Ahead:

US – from jobs attention switches to US inflation this week

  • USD: Fed FOMC meeting - risks remain tilted dovish at this week’s FOMC meeting, notwithstanding the stronger May jobs report. The slowing in inflation over the past two months will be welcomed by Chair Powell at the press conference on Wednesday, but he will likely highlight that the Fed needs to see more data to be convinced that inflation is slowing sustainably to 2%. Chair Powell may also focus more on indicators like job openings that show that the labor market has rebalanced as another sign that inflation should slow further. In the Fed’s summary of economic projections (SEP), Q4/Q4 2024 core PCE is likely to be revised up to 2.9%, and the median “dot” will now show two instead of three cuts this year. But these changes are widely expected and should not be market-moving. A hawkish risk would be if the 2024 dot moves higher by 50bp instead of 25bp.
  • USD: US May CPI MoM – Citi: 0.1%, median: 0.1%, prior: 0.3%; CPI YoY – Citi: 3.4%, median: 3.4%, prior: 3.4%; CPI ex Food, Energy MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 3.5%, median: 3.5%, prior: 3.6% - after slowing to 0.29%MoM in April, core CPI inflation should slow further in May to 0.26%MoM. This would round still to 0.3%MoM but with a clear chance of a reading that slows to 0.2% rounded. Citi Research also expect recent gradual slowing in owners’ equivalent rent to continue with a 0.40% increase. Core goods prices should also decline a modest 0.1% while headline CPI should also rise a modest 0.1%MoM reflecting a seasonally adjusted decline in energy prices.
  • USD: US May PPI Final Demand MoM – Citi: 0.2%, median: 0.1%, prior: 0.5%; PPI Final Demand YoY – Citi: 2.6%, median: NA, prior: 2.2%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.3%, prior: 0.5%; PPI ex Food, Energy YoY – Citi: 2.4%, median: NA, prior: 2.4%; PPI ex Food, Energy, Trade MoM – Citi: 0.2%, median: NA, prior: 0.4%; PPI ex Food, Energy, Trade YoY – Citi: 3.3%, median: NA, prior: 3.1% - after a strong increase in producer prices in April that was coupled with downward revisions to March, Citi Research expect a more modest 0.2% rise across various measures of PPI in May, including in total PPI final demand and core PPI that excludes food, energy, and trade services though risks around PPI in May are roughly balanced. Core goods prices in PPI have been rising recently and continue to present upside risks to consumer goods prices. However, pricing power of businesses is likely much less now than over the past few years, and rising input costs in PPI may not translate to rising consumer prices in CPI. Core services prices that matter for PCE inflation should be mixed, but overall on the softer side.
  • USD: June preliminary University of Michigan Sentiment – Citi: 72.5, median: 73.0, prior: 69.1; 1-year Inflation Expectations – Citi: 3.2%, median: NA, prior: 3.3%; 5-10y Inflation Expectations – Citi: 2.9%, median: NA, prior: 3.0% - with realized inflation slowing more recently and gas prices declining, Citi Research expect some improvement in the sentiment index to 72.5 from 69.6 in the June preliminary report but also expect a modest pullback in 1Yr inflation expectations to 3.2% from 3.3% and 5-10Yr inflation expectations to 2.9% from 3.0%.


Euro area, UK – UK labor force data and Norway/ Sweden inflation in focus this week

  • GBP: UK: National living wage in focus — aside from the political noise, in focus for the MPC will be the macroeconomic data, and in particular wage growthwhere the impact of the increase in the National Living Wage will be seen. On actual wage growth, Citi Research expect the increase in the National Living Wage to have boosted private sector regular pay by 1.1% MM, likely stronger than the MPC’s expected forecast and the regulated wage effect in 2023. However, wage and services inflation will likely moderate into May, in contrast to 2023. For the MPC, these data is likely to keep the mood decidedly cautious. On Friday, the latest release of the monthly GDP data is likely to show a 0.1-0.2% MM fall with consumer credit data in particular suggesting downside risks. UK: Vacancies, Mar-May – Citi Forecast 880k, Prior 898k (Underlying continuing to ease); Pay rolled Employees (MM Change), May – Citi Forecast -4k, Prior -85k (Downward revisions); LFS Unemployment, Feb-Apr – Citi Forecast 4.4%, Consensus 4.3%, Prior 4.3% (Modest increases); LFS Employment Change (3M/3M), Feb-Apr – Citi Forecast -90k, Consensus -93k, Prior -178k; Average Weekly Earnings, Feb-Apr – Citi Forecast 5.7% 3M YY, Consensus 5.7%, Prior 5.7% 3M YY; AWE Ex Bonus, Feb-Apr – Citi Forecast 6.1% 3M YY, Consensus 6.1%, Prior 6.0% 3M YY (Private sector regular pay 5.9%. BoE Q2: 5.1%); UK Monthly GDP, April – Citi Forecast -0.1%MM, Consensus 0.0%, Prior 0.4% (Consumer weakness); GDP % 3M/3M, Feb-Apr – Citi Forecast 0.6%, Consensus 0.7%, Prior 0.2% (BoE Q2: 0.2% QQ)
  • SEK: Scandies CPIs – Swedish May CPI report, the last before the end-June Riksbank meeting, will be important to watch: Citi Research expect a further slowdown in CPIF ex-energy inflation, to 2.6% YY, confirming the undershooting already recorded in April vs the Riksbank forecasts (2.9% expected for May CPIF ex-energy). In Norway, inflation should continue to ease. Norway: CPI, May – Citi Forecast 3.1%YY, Prior 3.6%YY (Norges Bank 3.3%); CPI-ATE, May – Citi Forecast 3.9%YY, Consensus 3.9%YY, Prior 4.4%YY (Norges Bank 4.2%); Sweden CPIF, May – Citi Forecast 2.3%YY, Consensus 2.0%YY, Prior 2.3%YY (Riksbank 2.6%); CPIF Ex-Energy, May – Citi Forecast 2.6%YY, Consensus 2.6%YY, Prior 2.9%YY (Riksbank 2.9%)


Japan – BoJ meeting, Q1 GDP and the current account in focus this week

  • JPY: Bank of Japan board meeting – Citi Research expect the BoJ to maintain its target range for short-term interest rates at the MPM on June 13-14 but think it will probably signal plans to cut JGB purchases in July-September. Expectations on financial markets for a July rate hike are high, but the hurdle is equally high. By itself monetary policy cannot simultaneously stabilize the exchange rate and support domestic demand.
  • JPY: Citi Research expect Q1 GDP to decrease 2.1% QoQ annualized in the 2nd estimate will show real GDP growth of -0.5% QoQ and -2.1% QoQ annualized in the first quarter, effectively unchanged from -0.5% QoQ and -2.0% QoQ annualized in the first estimate. Based on first quarter corporate statistics data released last week, business investment looks likely to be revised up from -0.8% QoQ in the first print to -0.4% QoQ in the second estimate. Meanwhile, Citi Research expect a downward revision for consumer spending from -0.7% QoQ in the first estimate to -0.8% QoQ in the second print, reflecting the March survey of service industries.
  • JPY: Current account surplus to increase in April — Citi Research expect the current account balance to generate a ¥1.9466trn surplus before seasonal adjustment and a ¥2.4726trn surplus after adjustment in April (+¥3.3988trn and +¥2.0106trn, respectively in March). The surplus after seasonal adjustment likely increased in April. The trade deficit probably decreased in April as easing supply disruptions for automobiles helped increase goods exports. Rising overseas interest rates as well as yen depreciation likely kept the primary income surplus elevated.


Commodity Bloc – Australia’s May labor force data in focus this week

  • AUD: Australia May Labor Force Survey: Citi employment growth forecast; 107k, Previous; 38.5k; Citi unemployment rate forecast; 3.9%, Previous; 4.1%; Citi participation rate forecast; 66.7%, Previous; 66.7% - Citi Research expect the unemployment rate to fall again in the May LFS this year as May tends to be a strong month for employment gains ahead of the Winter holiday seasons and end-of-year financial sales. Citi Research pencil a 200k increase in jobs in original terms, compared to 180k in May last year. The ABS updates its seasonal adjustment factors every month for the LFS, but using last year’s seasonal adjustment factor, Citi Research see a 107k increase in seasonally adjusted jobs, leading to a drop in the unemployment rate assuming no changes to labor force participation.

Asia EM – China’s inflation, money supply, new RMB loans, TSF in focus this week

  • CNH: China PPI (%YoY) May – Citi Forecast -1.4, Consensus -1.5, Prior -2.5 - base effects could further lift PPI to -1.4%YoY in May, with a small positive sequential change. Earlier released manufacturing PMI showed further upticks in industrial prices, and prices of some upstream products like cement and steel also rose in the past month.
  • CNH: China CPI (%YoY) – Citi Forecast 0.2, Consensus 0.4, Prior 0.3 – China’s inflation could stay low albeit steady in May. Citi Research expect +0.2%YoY CPI inflation vs. +0.3%YoY in April. There were early signs of pork price recovery in May, yet the size of price hikes for end consumers was small at +1.2%MoM. Vegetable prices were still soft at -3.4%MoM. With robust travel but soft spending during the Labor Day holiday, services prices may not lead to upside surprises either.
  • CNH: China Money Supply (M1, %YoY) May – Citi Forecast -2.0, Consensus -1.2, Prior -1.4; Money Supply (M2, %YoY) – Citi Forecast 7.0, Consensus 7.2, Prior 7.2 - it is not clear if the impact of the “manual interest rate adjustment” ban has faded fully – if it drags on, M1 and M2 growth could stay subdued, at -2.0%YoY and 7.0%YoY, respectively.
  • CNH: China’s new RMB Loans (RMB bn); Total Social Financing (RMB bn) – Citi Forecast 2600, Prior -72 – Citi Forecast 1200, Prior 730 – Citi Research expect soft new RMB loans at RMB1.2trn. Household credit demand could stay sluggish with property sales still weak in May and potentially delayed purchase decisions before the latest round of easing. Corporate borrowing appetite should stay low, leading to PBoC’s guidance for banks to boost lending in late May (The Standard, May 23, 2024). Government bond issuance accelerated to net financing of RMB1.2trn in May and new TSF could inch higher to RMB2.6trn, with growth of outstanding TSF rising to 8.6%YoY.

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